For the first time, crypto derivatives will be traded over the counter, opening up the marketplace to a wide range of new institutional participants
Copper announces the expansion of the ClearLoop digital asset trading framework to include collateral management for crypto derivatives.
The move will enable crypto derivatives to be traded over the counter (OTC) with significantly reduced risk for all parties involved, opening up the marketplace to a wide range of new institutional participants.
The new collateral management suite was developed specifically for the needs of the fast-growing institutional marketplace. GSR, a leading digital asset trading firm and a Copper client, served as a key advisor in the product design process.
With this new functionality, Copper acts as an independent third party for collateral management and settlement. Collateral stays in the Copper ecosystem, and its value is continually tracked.
Derivatives are one of the most significant investment instruments in the digital asset space, with OTC derivatives often cited as a preferred choice for more traditional investors making larger trades.
In 2019, it was predicted that OTC derivatives held between 60-65% of crypto markets activity.
Such products can be tailored to an investor’s specific market view and risk profile, can offer greater consistency than other instruments, and give an opportunity for a wide range of different trading strategies, with products such as forwards, swaps or options available to investors.
However, when traded OTC, derivatives can create a number of risks for counterparties, including credit risk exposure and challenges in managing collateral, as the derivative have not been traded through an exchange.
ClearLoop now significantly reduce these risks by allowing parties to post collateral on the contract within Copper’s independent, highly secure MPC custody. Collateral is deposited into segregated, cold storage and locked until the trade reaches maturity.
This provides the client with absolute transparency and peace of mind that their collateral is being safeguarded by a third-party custodian rather than taking direct credit risk.
Dmitry Tokarev, Chief Executive Officer, Copper Technologies, said: “When OTC derivatives came to the world of crypto, they were considered to be the single most important development for institutional investors. For the first time ever, asset managers and hedge funds could gain exposure to cryptocurrencies without the need to worry about custody. However, over the past year, the world of OTC derivatives has fallen into a state of stasis, as no real solution has emerged to ongoing challenge of collateral management. When a party posts collateral against a trade, the other party becomes subject to a range of operational risks, such as credit risk.
“In the world of traditional finance, services that manage collateral are well established, however, in crypto, the bar to providing such services is set extremely high because of the advanced technology required. Our expansion of ClearLoop’s infrastructure to cover collateral management OTC derivatives is a seminal moment for both Copper and the industry.”
“Building an institutional-grade product requires expert insights on what traders need to thrive. GSR’s consultation has been invaluable, especially given their central role in the rapidly-evolving crypto derivatives market. With the arrival of a fully developed collateral management framework to support the efforts of prominent market makers and others, we see great potential for further growth in the derivatives market.
Jakob Palmstierna, Head of Investment Solutions, GSR, said: “OTC derivatives are often cited as the preferred choice for more traditional investors, corporate entities can now trade products that are specifically built for them without the collateral leaving the custodian. This is a powerful way to reduce exchange and operational risk, giving institutions peace of mind.”